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Equipment Expensing for Tax Purposes

Will the existing 2014 rules be altered?

On December 31, 2012, the Congress allowed a number of provisions which were favorable to taxpayers to expire. On January 2, 2013, our national legislators passed an extension of many of those laws. Among them was the restoration to the 2011 levels for Section 179 Depreciation and the reinstating of Bonus Depreciation. Both of these rules allow a business to expense (write off) for tax purposes the cost of equipment purchased in the year placed in service, rather than using normal depreciation rules, writing it off over, usually 2 to 7 years, depending on the type of equipment.

Most businesses will need to purchase equipment at some time or another.

These provisions were enacted to encourage businesses to make investments in equipment, which they perhaps might not otherwise make, thereby creating jobs and otherwise improving both the business and the local, state and national economies.

For 2013, the law provided that a business could write off up to $500,000 of the first $2,000,000 in equipment placed in service during that year, with the $500,000 being reduced dollar for dollar by the excess of total equipment purchases over $2,000,000. (So, if the business bought and began using $2,500,000 in equipment in 2013, the Section 179 Deduction would not be allowed, and the equipment would all be depreciated under normal depreciation rules, over time.)

For 2014, the Section 179 rules were returned to those from several years ago: Replace the $500,000 with $25,000 and the $2,000,000 with $200,000, and you’ve got the picture.

Another important and related provision is Bonus Depreciation. This provision has been around for several years, and for 2013 allowed for the deduction of 50% (some earlier years were higher) of the cost of new equipment placed in service during the year. This provision expired at the end of 2013, and disappears for 2014 and thereafter, unless renewed.

It was also good that businesses knew for all of 2013 what the rule would be when tax time came. So, it could make its equipment purchases using effective tax planning. For 2014, we aren’t so lucky.

While it is possible that the Congress may act at some time before the end of the year to restore one or both of these provisions, there is no guarantee they will. They also might not make the Section 179 dollar amounts less than the 2013 amounts, and might restore Bonus Depreciation but at some lower percentage or apply new rules.

The Senate Finance Committee leadership attempted to pass a law known as the (EXPIRE) Act, which would have extended the 2013 amounts for two years, but it failed due to a filibuster, reportedly due to the inclusion of other tax breaks. There are reports that there is a House Bill which would make the 2013 limits permanent, but the present political turmoil will make it a tossup as to whether any change is made in the rules for Section 179 or Bonus Depreciation.

Of course, no business should buy equipment for the sole reason of being able to get a tax benefit; so while we can all be hopeful that the valid reasons for which the Congress placed these benefits in the law will prevail, if you need the equipment, you should consider buying it, and hoping for the best as to when you can deduct it.